How China's private sector will not only survive but thrive amid the trade war

Even before the trade war flared, private firms have already been backed into a corner by soaring costs for financing, taxes, energy, rent, labor and unfair treatment by their own government which favors state-owned companies. When the trade war headwind intensifies, the private sector bears the hardest brunt as most of them are exports-oriented. Considering the role it plays in China’s economy, the government is taking countermeasures to help shore up the private sector. The change of government’s attitude towards the private sector can somehow be construed as unexpected benefits generated indirectly by the trade war,a blessing in disguise to some extend.

Premier Li Keqiang promised to reduce burden on private firms. Photo: DWnews

There is a growing trend of private Chinese firms downsizing the workforce in a bid to survive amid the escalating trade war, which led to less orders placed along with a depreciating yuan that raises the cost of imported materials. Even before the trade war flared, private firms have already been backed into a corner by soaring costs for financing, taxes, energy, rent, labor and unfair treatment by their own government which favors state-owned companies, an open secret  rarely covered by official media but a glaring fact.

Compared with their state-owned counterparts, private firms are often discriminated in everyday business operations, particularly in terms of securing financing. Strapped of cash, they have to resort to loan sharks or shadow banking to get funded. The unregulated financing sector has reached its zenith until the government has spotted tremendous risks it entails. Hence, a regulatory crackdown on financial risks and debt ensued, pushing up borrowing costs and making it tougher for private firms to get funding, sparking a growing number of defaults.

The government is also taxing Chinese private sector too heavily. In terms of percentage of contribution to government tax revenue, private sector accounts for more than 50%. In comparison with other major developed countries and emerging markets, China's tax burden is mainly borne by private firms. From the perspective of the proportion of tax to corporate profits, according to statistics from the World Bank, in 2017, various tax levies amount to as high as 67% of total profits of Chinese enterprises across the board, second only to Brazil.

When most private firms are struggling to turn profitable, state-owned firms have seen steady increase of profit in recent years thanks to government policies that favor these firms, even though they are less efficient than their private rivals.

On an unequal footing, in order to gain access to land and capital which are intrinsically lopsided towards the state sector, many private businessmen had no choice but to bribe and collude with officials to get approvals and permits. However, since Xi came to power in late 2012 and launched an unprecedented anti-corruption campaign, many private businessmen found themselves in the campaign’s crosshairs because of their collusion with corrupt officials.

Although China is trying to correct the imbalance by gradually opening up previously restricted area to private sector by accelerating its so-called mixed ownership reform, allowing private capital to invest in state-owned enterprises in strategically important sectors. But that reform is aimed at revitalizing the state sector, and private firms are not allowed to take a controlling stake in state-owned enterprises, reminiscent of the public-private partnership in the 1950s which ended up with private assets seized by the government. 

The trade war benefits

Despite the government’s penchant to scale up the state sector, nowadays, the scale and influence of China’s private economy is too large to be marginalized as it can be summarized by the figure 56789 – the private sector contributes 50 per cent of tax revenue, 60 per cent of gross domestic product, 70 per cent of industrial upgrades and innovation, 80 per cent of total employment, and 90 per cent of the total number of enterprises.

When the trade war headwind intensifies, the private sector bears the utmost brunt as most of them are exports-oriented. Considering the role it plays in China’s economy, the government is taking countermeasures to help shore up the private sector. The change of government’s attitude towards the private sector can somehow be construed as unexpected benefits generated indirectly by the trade war, a blessing in disguise to some extend.

The People’s Bank of China has already fine-tuned its monetary stance to add more liquidity to the financial market, state banks are directed to channel more financing resource to small businesses and individuals. The Export-Import Bank of China, the country’s leading provider of export financing, also pledges to team up with other government agencies to help trading companies who have been hit hard by the US trade tariffs.

Appeals for the government to substantially cut its tax levy has grown louder after the trade war, especially since the US President Donald Trump signed into law a reduction in the corporate income tax rate from 35 per cent to about 21 per cent. Beijing has answered the calls with tax-cut pledges. Such cuts would “be the most effective tool” to help stabilize growth. With the economy on the brink of a downward trend, the government will be more determined to deliver on its tax-cut promise.

In addition, Beijing has taken the unusual step of assuring China’s small businesses that the government will not abruptly raise their labor cost burdens after a planned regulatory change to tighten social fund collection stirred fury and fear among private firms. Premier Li Keqiang promised the government would maintain for now the status quo on the collection of corporate contributions to social funds and would study lowering social welfare contribution rates to ensure “there is no increase in the corporate burden”.

At the core of the escalating US trade war with China are complaints about Beijing’s subsidies to state enterprises and the increasing dominance of the country’s state-owned enterprises. Like foreign investors who have long cried out for an even playing field, Chinese private firms have also largely been shut out of strategic and potentially lucrative sectors such as banking, health care, energy, television and broadcasting. So opening up these sectors and even allowing controlling stakes for foreign enterprises will also grant Chinese private firms the same opportunities. 


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